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November 27, 2013

4 Ways Insurance Can Protect Clients’ Retirement Funds

Even those Americans who are confident about their path to retirement security likely don’t understand how vulnerable their savings are.

With lingering economic uncertainty and rumblings about the future of Social Security, many Americans feel a continuing unease about their prospects for a secure retirement.

This sentiment was aptly captured by ING U.S.’s Retirement Revealed study, in which nearly half (48 percent) of respondents — representing more than 4,000 adults ages 25 to 69 with full-time jobs — indicated they did not feel prepared for retirement.

Of course, it’s possible that these respondents were merely articulating an accurate assessment of their retirement preparation. After all, in its 2013 Retirement Confidence Study, the Employee Benefit Research Institute learned that 57 percent of workers in the United States have less than $25,000 in savings and investments (excluding home values). One can hardly feel confident with a retirement nest egg that is on par with the sticker price of a new car.

Yet, astute financial advisors should be just as worried about the half of Americans who say they are confident about their pathway to retirement security. Clients who fall in this category may indeed have their acts together, with a clear-eyed plan for the future and a solid track record of saving. But do these clients really understand how vulnerable their retirement plans are to the perils of life?

The fact is that a range of risks — from serious illness, to premature death, to job loss to other financial constraints — can arise at any time and from any angle. These risks can deliver serious setbacks to a retirement savings strategy or drain away assets in ways that make it difficult to recover.

To help protect your clients’ retirement momentum, here are four tactics that can keep these unpredictable life risks at bay, both before and during retirement.

Tactic #1: Tapping group life at the workplace.

Workplace retirement savings will be exposed in two significant ways if your client dies prematurely. First, and most obviously, surviving family members may need to liquidate or take large loans from the account to overcome the loss of income, weakening the ability to pursue long-term investment gains. The second exposure is the loss of potential future contributions, which might have totaled hundreds of thousands of dollars.

Group life insurance is an inexpensive but powerful shield against these two forces. By delivering a tax-advantaged lump sum to the surviving family, the death benefit can help to ease short-term financial pressures and keep a 401(k) or IRA balance intact.

Often, the employer provides a death benefit equivalent to the deceased’s annual salary at no cost. While this amount of coverage is generally not enough, it does provide a base amount. What’s more, step-ups to higher amounts of coverage are usually very affordable and often require no underwriting.

This tactic is an easy one. Remind your clients to sign up for group life insurance at their company’s annual enrollment time.

Tactic #2: Cushioning medical costs with voluntary benefits.

Premature death is just one of the perils that might put a client’s retirement savings at risk. Serious illnesses or accidents can generate significant expenses for an individual, even if there is a decent medical insurance plan in place. Too often, families do not have ready cash flow to deal with extensive out-of-pocket medical expenses or to weather the elimination period before disability payments kick in. Point in fact: the 2011 National Bureau of Economic Research Financially Fragile Householdsreport found that nearly half of Americans are not able to access $2,000 easily for an unexpected expense.

In cases like these, the client may be under intense pressure to take out a 401(k) loan, which will diminish the account’s compounding potential and may, if not paid back, permanently dial back retirement savings.

To guard against this risk, your clients may be able to buy accident, critical illness, hospital indemnity or disability coverage through payroll deductions at an affordable price. When reminding your clients about these insurance coverage options, be sure they realize policy payouts typically are unrestricted and can be used for anything — car payments, mortgage, food, etc. — and not merely for medical expenses.

Tactic #3: Building retirement funds through individual life insurance.

The first two approaches — group life and voluntary benefits — give clients fast, usually tax-free money that can protect the flanks of their vital retirement savings, what ING U.S. refers to as their “orange money.” With that employer-enabled insurance coverage in place, advisors can begin the conversation about individual life policies and how they both protect and offer increased flexibility to the client’s retirement.

Don’t be surprised if your client doesn’t place life insurance and retirement security in the same mental bucket. The 2012 ING U.S. Insurance Revealedstudy found people were most familiar with life insurance’s protection benefits (the death benefit), placing the greatest value on such uses as replacing lost income (26 percent) and paying off debt (23 percent). Yet, not many respondents highlighted the value of life insurance in protecting retirement savings (4 percent) or building wealth (1 percent).

While employer-sponsored retirement plans and IRAs are the primary mechanisms for retirement savings, clients may be maxed out in their plans or desire the added protection of a death benefit. Through a cash value life insurance policy, such as indexed universal life insurance, a client can build cash value that may provide financial flexibility later in life.

Few careers these days end after a 30-year tenure and with a gold watch. If a client is surprised by a job loss a few years before retirement age or simply wants to leave full-time work before Social Security age, the policy’s cash value can help protect his or her options. Make sure your clients understand this extra measure of security — and its direct impact on their retirement vision.

Tactic #4: Creating a steady lifetime retirement income with annuities.

By the time a client reaches retirement age, it might seem that the need for insurance — or any type of protection — has come to an end. But, clearly, this is not the case. Clients often make withdrawals from retirement accounts to create their income stream in retirement, yet they may be concerned about the endurance of those savings. Will their savings last an entire lifetime? After all, a lifespan that is five or 10 years longer than expected or higher-than-anticipated medical costs in later years can greatly accelerate the depletion of retirement accounts.

To offset this risk, many advisors are turning to fixed annuities specifically designed to provide a certain amount of annual guaranteed income, usually with upside potential based on interest rates or some other mechanism. This insurance contract, in effect, protects the client’s lifestyle and eases concerns that market forces or life events will prematurely deplete retirement account values and the income those values might have generated.

Advisors can do their clients a service by explaining the potential role of annuity income as a guard against such unpleasant financial surprises in retirement.

Covered at every angle

These four insurance approaches — group life, voluntary benefits, individual life and annuities — are well-known protection strategies within the financial services industry. Yet, many advisors could do more to educate their clients on the power of these strategies as a means to protect retirement momentum.

By explaining the role of these four tactics to your clients, you will be delivering a more holistic brand of retirement advice — one that acknowledges and addresses the risks that hover on the periphery of any retirement vision. Your clients will appreciate the education and your efforts to keep their retirements on track and fortified against life’s uncertainties.